NuStar Energy L.P.
Q3 2009 Earnings Call Transcript

Published: 27 Oct 2009

[Operator:]

Good morning, my name is Heather and I'll be your conference operator today. At this time I would like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings LLC Third Quarter 2009 Earning's Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions) Thank you at this time I would like to turn the call over to Mr. Mark Meador. Sir you may begin.

[Mark Meador:]

Thank you, operator. Good morning and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings LLC's third quarter 2009 earning's results. If you have not received the earning's releases and the like copies of each, you may obtain them from our websites of nustarenergy.com and nustargp.com. Attached to the earning's releases, we have provided additional financial information for both companies including information on NuStar Energy L.P.'s business segments. In addition, we have posted operating highlights and fundamental data for our operations under the investors' portion of the NuStar Energy L.P. website. The factor reviewing the in cash tables and operating highlights you have question from information that is presented there, please fell free to contact this after the call With me today is Curt Anastasio our CEO and President of NuStar Energy L.P. and NuStar GP Holdings LLC; Steve Blank our CFO and other members of our management team. Before we get started we would like to remind you that during the course of this call NuStar management will make certain statements concerning the future performance of NuStar and all the statements will be forward-looking statements as defined by Securities laws. These statements reflect our current views with regards to future events and are subject to various risks, uncertainties and assumptions described in NuStar Energy, L.P. and NuStar GP Holdings Annual Reports on Form 10-K for the year ended December 31, 2008 and subsequent filings with the Securities and Exchange Commission. As the results may materially differ from those discussed in these forward-looking statements and we undertake no duty to update any forward-looking statements to conform the statements or actual results or changes in our expectations. During the course of the call, we will also make reference to certain non-GAAP financial measures. We have provided additional schedule under the investors in financial reports in SEC filings portion of the NuStar Energy L.P. website reconciling these non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with the US generally accepted accounting coming principles or GAAP. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance. I'll now turn the call over to Curtis.

[Curt Anastasio:]

Good morning and thanks for joining us. For the third quarter of 09, NuStar Energy reported distributable cash flow of $61.5 million or a $1.13 per unit, EBITDA of 124.4 million and earnings to the limited partners of $56.1 million or a $1.03 per unit. GP reported distributable cash flow available to unit holders for the third quarter of $18.9 million or $0.44 per unit and earnings of 17.7 million or $0.42 per unit. While these results were much lower than last year's all time record third quarter results, I am pleased to say they were still the third best result in NuStar's history and inline with our guidance. The majority of the decline quarter-over-quarter, was mainly due to lower earnings from asphalt operations, which were impacted by a weaker product margin per barrel or $5.03 per barrel compared to last year's record of $16.44 per barrel. While the full year per barrel margin is expected to be lower than last year's, it is still much better than historical average. The margin for the nearly two year period that we've owned these former -- asphalt refineries is expected to be around $7.50 significantly higher than the $3.78 per barrel average for the seven years prior to when we owned refineries. Thus we said at the time of the acquisition asphalt is seasonal, it's more volatile that our other business. But, that margins for future years would trend higher than historical markets especially 20/11 and later. In a period of weak demand asphalt pricing did not keep pace with the nearly 60% run up in crude prices through the end of the third quarter of 09. Our view of earlier in the year, that asphalt supplier would be lower due to lower production and minimal imports was correct as production and imports are currently 5% and 13% lower than 2008 perspective. However demand was weaker than even our conservative estimates, down about 15% compared to last year. The very low level of Federal Stimulus Funding of road projects, particularly in the markets we serve in the eastern part of the country was not enough to offset a weak economy and a late start to the asphalt season on the East Coast due to weather. Since weak demand did not allow us to raise our asphalt prices sufficiently in the period where crude oil prices kept going up, this squeezed the product margin in the third quarter. Keep in mind going into this year we were less confident about Federal Stimulus spending than the industry experts; however even our conservative of government's Stimulus spending in 09 proved to be optimistic. For the fiscal year ended September 30, of 09 industry data indicates that approximately 2.4 billion of the approximately $27.5 billion available for highway projects had been spend. Some industry experts estimated that 5.5 billion or more would in fact be spent by this time and the current amount spent for projects is not much higher than it was at quarter end, at around 3 billion. The good news is that is not a matter of if, but a matter of when this money will be spent. And it's now evident that most of it will be spend in 2010 and 2011. With nearly $13 billion of projects under construction currently and since asphalt specifically used at the end of the project, this gives us further confidence we will see the benefit from Stimulus spending next year and in 2011. We are assuming only a very modest economic recovery next year on US which should be supportive private sector asphalt demand particularly later in the year. With respect to asphalt supply we continue to see reduced production in the market as weak refining margins primarily due to high refined product inventories and now light/heavy crude oil spreads should cause refineries either to cut back or even shut down. This will benefit on purpose asphalt refiners like NuStar. In addition our view on coker projects further tightening asphalt supply and having a major impact in late 2011 and beyond remains intact. Our other two business segments, transportation and storage generated strong earnings in the third quarter. Both these segments generated nearly $80 million of operating income for the third quarter, significantly higher than the 59 million in the third quarter of last year and then nearly 69 million generated in second quarter of 09. I continue to be pleased with the results from these two business segments which have generated relatively stable cash flows during the worst recession since the 1930s, following the near collapse of the financial system in 2008. I am excited to say we also announced today a distribution increase at both the LP and the GP. The LP board declared a $1.065 distribution, an increase from the $1.05 pre quarter distribution paid last quarter and the third quarter of last year. Including today's increase the cumulative distribution per unit for the first three quarters of 09, is more than 5% higher than the same period in 2008. I'd also like to mention that all the distribution at NuStar Energy has been covered by the cash flows from the non-asphalt operations for the entire period that we've only asphalt refineries or since March of last year. And even in a weaker asphalt environment such as this year's, distributable cash flow from the non-asphalt operations has still covered our distribution for the nine months ended September 30, by 1.25 times. This effectively provides NuStar's investors with optionality on the performance of our asphalt operations. Since our other operations are expected to cover all of the distribution for the period that we've owned the asphalt refineries. Even if we had a shortfall in the cash flows from the non-asphalt operations, the cumulative holdback from the asphalt cash flows that we do under our 2

[Operator:]

(Operator Instructions) Your first question comes from the line of Steve Maresca from Morgan Stanley.

[Steve Maresca:]

I have two questions on asphalt, one on supply and one on demand. You talked about your view on coker projects coming online and that beginning to have an impact in late 2011 and beyond. Sort of read that delay was idling or taking down a few cokers, can you talk about how that impacts asphalt supply and what are the chances that some of these coker units may not come on?

[Curt Anastasio:]

Well, first of all on people idling bad cokers like Rolero (ph) that the reason they've done is actually helped reduce our supply this year. The light-heavy spreads came in. All these refineries try to lighten up this spread as much as possible so they've been getting less asphalt yield and that's why we're able to say as we did in my remarks that asphalt supply was a quite a bit lower, production quite a bit lower this year than it was in 2008. Not withstanding the idling of some coker capacity as you mentioned. And then beyond that, this story beyond that has really changed hardly not at all, we had a couple of delays. We've actually had an increase from our in coker capacity. I think it comes to 40 some thousand barrels a day increase. That's in our plan for 2011 and later and not a reduction but an increase in coker capacity coming on. So, that thesis is still very much intact despite the couple of delays we had and may be one or two cancellations. We have more coker capacity coming on than we thought

[Steve Maresca:]

Okay, on the demand side, you talked about obviously the stimulus money, you were less confident last year about government Stimulus spending and how they'd impact. What is giving you potentially greater confidence in 2010 and what are you seeing real time data points that things are starting to move forward on some of these projects?

[Curt Anastasio:]

Right. On the Stimulus spending -- the way the process worked after the government sort released this program in March really last year. States then had a period of time until June to identify the projects that they were going to do. Pretty much all of them did that, they identified their projects that they were going to do in order to get this stimulus money. And then after that you start the process of projects being led, and contracts had been processed and all the rest of it. Most of these projects get done within two or three year's time, because states don't want to forfeit the money. There was a high priority under the federal program for projects that can be done within three years. So, in order for a project to get done within three years from early 08, that project is going to get done by 2011. Spending on that project is going to be mainly in 2010 and 2011 to meet that three year deadline on these projects. And that spending obviously wasn't much in 09. I think I quoted 2.4 billion out of the $27.5 billion program through the third quarter of 09. And of course you don't see too much more in the fourth. So, it's obvious that a very large proportion of the 27.5 billion is going to be spent next year in the 2011 to get the projects done. Beyond that Mike Hoeltzel is here, do you want to comment further Mike on the spending?

[Mike Hoeltzel:]

Oh, spending is the combination of positives and negatives, as Curt mentioned the positive is the Stimulus spending heading and we also see upticks in the residential the housing starts. What's probably lagging a little is the County Municipal spending, but we expect to see that by the end of next year.

[Curt Anastasio:]

So that -- but that -- that will actually still be a drag in negative in 2010, the County and the Municipal. So, when you net all these things together the pluses and minuses we expect to see a slight uptick in demand in 2010.

[Steve Maresca:]

Okay. Thank you very much.

[Curt Anastasio:]

Okay.

[Operator:]

Your next question comes from the line of Gabe Moreen with Banc of America.

[Gabe Moreen:]

Good morning everyone.

[Curt Anastasio:]

Good morning.

[Gabe Moreen:]

Following up on Steven's questions on, I guess supply destruction. Is it fair to say I guess that ego point, since it was processing later and crude's really didn't have much asphalt supply coming in to pad one?

[Curt Anastasio:]

Correct. You are correct.

[Gabe Moreen:]

Okay. And then is it possible I guess to quantify just I guess, how many let's say thousands of dollars per day that maybe Paulsboro produces on the asphalt side?

[Steve Blank:]

Yeah we do have that. We're just trying to make sure we give you the right answer.

[Curt Anastasio:]

Its about 7,000 barrels a day, as we understand.

[Gabe Moreen:]

Okay great. That's helpful. And then another question on asphalt just in terms of thinking about, how you are going to running the plants in the fourth quarter to yields relative to last year. I guess how should we be thinking about directionally how much you're going to be producing versus last year's fourth quarter?

[Curt Anastasio:]

Especially it should be we re-ramp the refineries down quite a while. The fourth quarter should be substantially similar to last year. I don't see a major change on that. You guys if you have any vision to that?

[Mike Hoeltzel:]

We're planning our turn around schedule in December, January timeframe just as we did last year. So we should see about the same level of throughput.

[Steve Blank:]

Maybe slightly lower.

[Curt Anastasio:]

Slightly lower, going through our typically ramp down.

[Steve Blank:]

Yes, well they won't be higher, it should be slightly lower than anything.

[Gabe Moreen:]

Great. Thanks that's helpful.

[Operator:]

Your next question comes from the line of Brian Zarahn with Barclays Capital.

[Brian Zarahn:]

Morning.

[Curt Anastasio:]

Morning.

[Brian Zarahn:]

With as you mentioned S&P moving its negative outlook and all the rating agencies giving a stable outlook, are you a little more aggressive now or have the flexibility to look at M&A opportunities; what are you seeing in the marketplace?

[Curt Anastasio:]

Well of course, it is anything that you know helps to lower our cost to capital going forward is a positive thing. So we're very pleased to have the positive or upgrade assessment of the all three rating agency's assessment of our financial conditions. So of course, that is a positive going forward. You know we do have some interesting acquisition opportunities that we're looking yet, both in the US and around the world and they're of all types. I would say just like our internal growth program there principally in storage and they're not necessarily US, it could be international as well. We're not limited geographically by what we look at, but we take everything into account obviously if we're putting a new stake in the ground in a new geography, whether that makes sense for us. But we don't limit ourselves geographically per se. And so there is a lot that for us to look at right now and hopefully we'll pull the trigger on one of them.

[Brian Zarahn:]

Is there a concern as it's a sizeable acquisition that they would the agencies would sort of respond negatively or...?

[Curt Anastasio:]

If that's a good deal and we finance it appropriately enough. No.

[Brian Zarahn:]

Okay.

[Steve Blank:]

I mean, one thing goes good about NuStar is we have one of the lowest cost of capital of any MLP. So, practically every MLP will have more difficulty making an acquisition accretive compared to NuStar. So, we really have a wide band of acquisition opportunities and that band is much wider than it would be for the vast majority in the MLPs out there.

[Mike Hoeltzel:]

Yeah, on the equity side that's of course, because our top spread is cap to 25%, while most others are at 50%, and with a negative getting removed from SMP that can only help across the data, across the debt number really got terribly out of line with the others. It's a bit higher because of the negative outlook, but it wasn't a major factor. Much more importantly for any company looking at doing M&A deals the general health today is the capital markets compared to year ago. Rates are down terrifically from where they were just six months ago. And a lot from a year ago from running investment grade company.

[Brian Zarahn:]

And then in the growth CapEx can you review the third quarter number as well as your 2010 guidance?

[Steve Blank:]

Third quarter growth CapEx?

[Brian Zarahn:]

Yes.

[Curt Anastasio:]

Yeah third quarter we spent about 32 million on strategic growth, about 16 million on of our liability for total, that we had some other CapEx in there for total about $50 million. That was just for the third quarter. Next year we said a little over 300 million for -- capital and the liability I think it's just north of $7 million. So for -- roughly at $400 million.

[Brian Zarahn:]

And finally what's the availability on your revolver?

[Steve Blank:]

At the end of the third quarter, it was over

[Curt Anastasio:]

550.

[Steve Blank:]

550 at the end of the third quarter. We had 12 million in cash on the balance sheet.

[Brian Zarahn:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Michael Blum with Wells Fargo.

[Michael Blum:]

Thanks, good morning everyone.

[Curt Anastasio:]

Good morning.

[Michael Blum:]

Just couple, I guess first a conceptual question. Given that your non-asphalt businesses are essentially supporting the distribution and the growth in the distribution. Are you thinking differently at all about the asphalt business? I know before, you talked about holding back half the cash flow. Is that now going to -- should we now think of that as the asphalt cash flow will be used, I guess in lieu of third-party funding for growth or are you still thinking that it will partially contribute to the future growth and the distribution?

[Steve Blank:]

I think the latter that it will partially contribute to further growth in the distribution. We were fortunate enough since we bought the business in part because you it did so well in the first year. We really had, we had not -- money is puchable, but if you just look at the cash flow coming out of storage and transportation, it's more than adequately finance the distribution growth. Last year, we did about a 7.5% increase in the distribution. This year it's about 5% year-over-year, so the base business, the old business storage and transportation has just done very, very well. So, we have an immediate to take 50% of the cash flows from asphalt and use that to pay the distribution; the idea there was that the we would, because of the greater volatility, one or two times cover on that business or another way of saying that only paid half past the money. I think next year, there's a chance the storage and the transportation business could finance all of the distribution and the increase. It really is going to depend on what asphalt does next year. We've budgeted the certain amount, which as Curt said is up quiet a bit from what we expect to do this year, but we got a long way to go before we know what that business will produce.

[Michael Blum:]

Okay. Second question is just on maintenance CapEx, I guess you took your estimate down for 2009? Can you talk about what's driving that and are you just deferring certain projects to 2010?

[Rick Bluntzer:]

A lot of the expense regards that we are seeing is part of our reliability programs as you cycled some of your tanks and your pipelines through the program, we're seeing reductions and repeat. So, a lot of that is just real saving that we've seen from our programs that have in that.

[Curt Anastasio:]

You know, when to just follow up on with Rick just said, Mark that are our took a review at we were spending in reliability versus EBITDA and versus asset base us versus our peer group. And we spend much more on percentage basis than others on reliability. Some of that maybe classification liability it's not a GAAP term. But I think what we are seeing is perhaps the benefit of having spend, to Rick's point a lot on reliability in past years particularly on the Kaneb asset, which we acquired in 2005.

[Michael Blum:]

Okay, thank you very much.

[Operator:]

Your next question comes from the line of Miller Barner (ph) with Hartz Capital.

[Unidentified Analyst:]

Good morning everyone.

[Curt Anastasio:]

Good morning.

[Unidentified Analyst:]

Quick question

[Steve Blank:]

It makes you much more conservative, I mean the bottom-line is you are not going to be borrowing at 75 basis points and in three years time. If the economy recovers, interest rates are going to go up and so what we need to do is be cognizant of a couple of things. Power across may go up in time, which was a big benefit for us this year and interest expense being low this year was a big benefit. So you just don't count on those things repeating in future and we haven't. When we looked at our budget next year, we just looked at the forward curve for LIBOR and then when we look at the business out for our five years, we certainly think interest expense and power are going to go up. So the bottom line is while we budgeted a distribution increase for next year, it's -- I'll think that we are committing to it.

[Curt Anastasio:]

On the other, I mean part of our job is to come up with revenue opportunities, right and profit opportunities like we did what we think the single asphalt acquisition, which is done well, we think it's going to even do better over the long-term for us, and that's part of our job too. Right now, you are focused on interest expense although it's going to go higher later, that's today's concern; tomorrow it will be something else. I mean we've had periods of high inflation. There's been lower lately, a lot of people on this call probably don't remember high inflation, I'm old enough too, but...

[Unidentified Analyst:]

So am I.

[Curt Anastasio:]

My only point is really it's always something, and so you have to in a long term planning for a company, yeah, certain line items may go up or down over a certain three to five year period. Our job is to keep improving bottom line performance of the company. So it's not just that it's good for our CFO to be conservative about interest expense is going up and we have to be cautious and of course he is right, and I agree with that. But on the other hand, we're optimistic on the revenue side that we'll continue to find good profit opportunities. And that's why -- that's really the excitement around this $500 billion of high returning internal growth programs over the next two to three years is part of what's it going do that for us. And also on the acquisition front, we're very likely to pull the trigger on something within that same period; that's a nice and creative acquisition too. So it's just -- I'm not telling anything you don't know, but it's that sometime we get very focused on one line item and how it might change over the next few years, but it's a total picture in managing a company that we're trying to manage.

[Unidentified Analyst:]

Absolutely. And I guess a quick follow up on that is I guess, when you are talking about the $300 million of growth opportunities, 20% return, obviously there is an interest rate cost and other cost factors into that, I take it you don't come up with a 20% opportunity based on the 75 basis point carrying charge is what you think the long term carrying charge would be; is that right?

[Steve Blank:]

So, that's exactly right. That's what -- you've said what I was just going to add to Curt's comment, which is when we run numbers, no matter how small the CapEx is or how big it is, we presume 50-50 debt equity financing and the debt rate we use is our current cost of borrowing 10 year money, not at 75 basis points under a revolver.

[Unidentified Analyst:]

Okay. So it seems like, right now the organization has a nice opportunity to run it with a fairly fat covered ratio and spend that extra cushion developing other projects over the next two to three years add to the bottom line without really impacting any long-term opportunity or distribution growth for the partnership. Fairly -- a fair statement?

[Steve Blank:]

Yes.

[Unidentified Analyst:]

Okay. Great, thanks for your time, I appreciate it.

[Steve Blank:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Cerressoli (ph) with Goldman Sachs.

[Unidentified Analyst:]

When you say a slight uptick in asphalt in 2010, is it safe for us to assume that a higher proportion on the stimulus spend will occur in 2011.

[Curt Anastasio:]

I think probably it might end about evenly split between 2010 and 2011, in terms of just a federal stimulus money. So the -- what happened on the East Coast interestingly, when you look at where the federal stimulus dollars have actually been spent on growth project, the East Coasts were our markets are for asphalt that really been under represented, in other words under-spent even the three billion or so number that were out right now disproportionately elsewhere outside of the East Coast. So, while the overall program might be evenly split as I just estimated for year between 2010 and 2011, well actually see I think a disproportionate increase in 2010 East Coast markets, just because they've been under represent and on project at this point. I hope I didn't confuse you with that, but that's...

[Unidentified Analyst:]

No.

[Curt Anastasio:]

It's an overall number going on under the 27.5 billion in the net account East Coast oriented number that trend that we have in mind that we follow. And we think we are going to pick up, we are going to accelerate a little more in the eastern half of the country than even than the overall program well in 2010.

[Unidentified Analyst:]

Okay. In regards to the winter filling, can you give us some insight into how full you asphalt storage things are right now or currently?

[Curt Anastasio:]

We don't have a problem there, but I want to address it.

[Paul Brattlof:]

Yeah, we are very close to our target into the year inventory and not built very much add-on maybe 100,000 barrels since. So, we are slightly above, but we are just starting to look at some opportunities as some cheap barrel should.

[Unidentified Analyst:]

But you are not running into a storage over tick.

[Paul Brattlof:]

We are not in for close, yes.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Ross Payne with Wills Fargo.

[Ross Payne:]

How're you going guys?

[Curt Anastasio:]

Hi Ross.

[Ross Payne:]

First question

[Curt Anastasio:]

Well, first of all, I think you know the Federal Stimulus Program is not a matched program. So, that's like manna from heaven from the states. They do the projects and they get the money and they don't have to match the amount that the Fed had committed for them to spend on these projects. Once you get outside of that $27.5 billion program like under the normal say high way safety loop authorization program, yeah I mean it's been a very tough year for the states. I mean it's been -- really they are -- fiscally they are in the shambles. A large majority of them run deficit is maybe a mix of three or four states, Texas is one of them that is running a surplus. So, everybody is under extreme financial stress and they are laying off teachers, they are cutting firemen, they are cutting salaries laying off government workers. So it's been a terrible year in that regard. And so that portion of naturals growth. But all government spending really is dependent on some of the economic recovery in 2010 and if believe there will be some of economic recovery in 2010 and we're saying we see a very, modest recovery in 2010. In economy you'll see some ups uptick in past revenues and the funding sources for state programs. And Mike you want to expand on that?

[Mike Hoeltzel:]

Yes, and we've individually polled rather the states that we market in, and most of them are not cutting there budgets from 2010 versus 2009. So we think it will at least be level.

[Ross Payne:]

And in kind of like my earlier point I mean -- I want to -- my understanding is that the state would match a lot of federal dollars for just general maintenance and are they just... this year they are just coming up with the matched portion? Is that fair to say? To some extent anyway?

[Curt Anastasio:]

I think so. I think and sort of there are two federal programs to tell about and we're talking about, one of which we always imagine sort the lets talk of the Obama Stimulus program, whatever they call it the incremental thing that's not a matched program.

[Ross Payne:]

Yeah I am speaking of the non-Stimulus spending for maintenance works?

[Steve Blank:]

Yeah full spending as a high way trust fund has to be shared, I mean its fully implemented.

[Curt Anastasio:]

And the states only have to match 20%.

[Steve Blank:]

Yeah 20%.

[Curt Anastasio:]

Yeah its 20.

[Ross Payne:]

Okay. So that portion did flow through to demand. Okay. Next question I guess is on the inflation adjuster for 2010. Did you say it was going to 2% below what we experienced in 09?

[Curt Anastasio:]

On that per cap adjustment. Yeah right now its tracking about its even a little less than 2% lower. I think the last number I saw was 1.7 or 1.8% down. And that's for the of course the second half of the year and we still benefit from the July 09 tariff increase for the first half of 2010. Which is why you end up sort of total year-over-year with a slight increase actually in tariff, 2010 versus 2009; because you have that kind of blended mid year effect going on.

[Ross Payne:]

Okay. All right. Also your power costs were down. Is that primarily high to natural gas? You I mean, I know a lot of natural electrical generation in Texas and other places is natural gas. But do you have natural gas fired pumps through what's driving the...?

[Curt Anastasio:]

Its really the electricity rate we have to pay. It's based on a substantial natural gas component. So its not that we're burning so much. We do burn natural gas but....

[Rick Bluntzer:]

We do at the refineries lot of it. But it is hard to gauge so electric. So...

[Curt Anastasio:]

Yeah we have power saving initiatives. I mean Rick and his guys, do everything they can power reduction and using power efficiently in our operations, so we do get benefit from that that we can track through. But we were helped a lot when you have natural gas going from $9 to $3 year-over-year that was a major impact on our electricity cost reduction.

[Ross Payne:]

And one final question. There was a fire at Volero's (ph) Corpus Christi refinery. Any impact from that and then any of the other outages or shutdowns and in Texas that you think may have a impact as you go forward into this next quarter and or your thoughts on 2010 on any kind of pin down?

[Curt Anastasio:]

No, nothing at the moment that would be really of noticeable a material in anyway. I detailed the ones that had been impacting us quarter-over-quarter. But right now there's nothing like that, that's going on. We actually have a light refinery maintenance schedule going on right now. So I don't see Danny Oliver you have anything to add to that?

[Danny Oliver:]

In the fourth quarter nothing planned that's going to affect us in out in between 10. We have everything between forecasted that we're aware of.

[Ross Payne:]

Right. That's it for me guys. Thanks.

[Danny Oliver:]

Thank you.

[Operator:]

Your next question comes from the line of Jim Murchie with Energy Income Partners.

[James Murchie:]

Hi guys. The talent (ph) on the third quarter for the transportation segment kind of ends up being a big number because of and the gross margin's up a little bit and the volumes down a lot. Is there a mix change going on there?

[Curt Anastasio:]

Not -- that's not a not a major factor. You are talking about a mix of product throughput, not of high grade.

[James Murchie:]

Well, or just miles, right? Because this isn't barrel miles its just barrels. And I was just wondering could I have the tariff up like double-digits when I saw from that?

[Curt Anastasio:]

And what period you're comparing?

[James Murchie:]

The third quarter versus the second quarter I mean obviously that's when the tariff increase went in but there was only 7% change plus right?

[Rick Bluntzer:]

So let's do the assets sales which we had moderate throughputs but a lower revenue per barrel. So when you got rid of them, it increased our revenue per barrel higher.

[James Murchie:]

Okay.

[Rick Bluntzer:]

And with that related there was tariff increase as well.

[James Murchie:]

Yeah okay.

[Mark Meador:]

A great deal of that was due to the tariff increase obviously.

[Curt Anastasio:]

That's a good point Mark made though and the asset sales actually help your -- the number your looking at.

[James Murchie:]

Yeah. But -- I'm getting like a 17% increase sequentially.

[Curt Anastasio:]

Probably sold them.

[James Murchie:]

Yeah.

[Curt Anastasio:]

We didn't sell them -- we didn't like the throughput. They just weren't making any money.

[James Murchie:]

Okay. Thanks.

[Curt Anastasio:]

Yup.

[Operator:]

Your next question comes from the line of Dan Horowitz with Raymond James.

[Darren Horowitz:]

Hey, guys Curt just a few questions for you on the base business. When you look at the 220 million that you have ear marked for organic storage growth and you are looking at the highest rate of return on new capacity and the timing of dollar spend. You've obviously got a growing long-term industrial lead in Gulf coast, but can you give us some color as to how you balance expanding heavy oil capacity to areas like Texas city and St James versus other domestic opportunities say in the North East or South East or even in the Caribbean for that matter?

[Curt Anastasio:]

The investment opportunity like you mentioned right now is mainly in Gulf Coast storage. But it's not exclusively. We've got some renewable fuel projects going on like in Northern California. We had some things related to the pipelines in Texas that we're going to spend money on. But the storage investments that we've been talking about they're also spacious, we're going to invest more money because we got an opportunity to do more in spaces down there. But, those investments are very heavily in crude and heavy oil, but not exclusively. We also have light products investments being made at those terms. Do you want to...

[Mark Meador:]

No. But it is the geographic of like St. James and Texas City with the heavy crude and needs in those particular areas is one of our areas we're going to meet comps and trade and all.

[Darren Horowitz:]

Okay, shifting over to the transportation side of the business with the 30 million that you mentioned there one; you're looking at the Mid-Continent market, you've said before that you wanted to add or make rental capacity on the east pipeline system. How do you balance spending capital there, again versus allocating more dollars towards say the essential in South Texas markets?

[Curt Anastasio:]

We don't really try to spread the capital by region, to make sure there is a balance among region. I mean our approach really is all of our business managers are competing for capital and really the best ideas win and the best projects win. Though, we had an opportunity on a good one on central east this past year, we expanded the southern end of the line. Captured certain incremental volume and that's going very well. We are capturing that volume and I think particularly you see it during the spike in the harvest season on that system. But, its really not -- we're not making capital allocation systems based on trying to have some sort of a spread among regions. Everybody is competing for scarce capital and have to come with the best idea.

[Darren Horowitz:]

I appreciate the color. Thanks.

[Curt Anastasio:]

Sure.

[Operator:]

Your next question comes from the line of John Tysseland with Citi.

[John Tysseland:]

Hi, guys. Good morning

[Curt Anastasio:]

Good morning

[John Tysseland:]

I think, you previously stated that, anywhere from 25 to 30% of your terminal storage that rolls over in one in less than a year to less than all year, and I was just curious given the fact that -- has now gone, I guess negative. Are you seeing less demand for any of your terminal storages is rolling over or is that still getting a rolled over pretty successfully at this point?

[Curt Anastasio:]

No, on the contrary, we've been renewing, Danny's people have been renewing contracts at significantly higher rates. That was a part of our story about what the storage segment has done better in 09 versus 08. This contango thing is kind of interesting. I mean for particular customers in particular places, particularly on the short term as you properly identify, it's a factor. But among our customer basis, this is really not a major factor driving our storage. I mean we have strategic customers, who want to be in certain locations for the long-term and just volatility helps storage too. But, Danny, you want to comment further on it.

[Danny Oliver:]

The carry that we've seen in the market, you know where the increase is the value of tankage even if that tankage is being used by customers more of a part of their system. But we do still see some carry in these markets on the product side and market structure is continuing to support demand for a portion of our storage. I think the contracts that you were referring to at beginning of the year, we started off you may recall about 29% of our contracts are up for renewal inside a year and that's down to about 24% now, and we'll be lower than that after the end of the fourth quarter, because we've got some large contracts that are basically negotiated just not executed that will be rolled out further. But the right increases have been significant annualized through the third quarter about 12.6 million incremental revenue versus last year and then forecasted for this year about 7.2 million as we've just seen partial increases.

[John Tysseland:]

Okay, that's helpful. And on the, I guess, when you look at your tank age, both domestically and international and adding to all your growth CapEx for about 220 in 2010, how do you risk adjust investing overseas and internationally, versus here domestically? Is it -- are you seeking higher return or do you think about it's just pretty much the same in terms of allocating that capital?

[Curt Anastasio:]

We invest in places with pretty low political risk, in fact, a lot of people would say now days at the United States is pretty politically risky compared to some of the other places that we invest in. But leaving that aside, we take into account all the factors relating to invest in that jurisdiction. If we have some tax leakage, because we have local taxes that we have to incur there, we take that into account in calculating the overall return on the project. And if the project survives, it looks attractive versus our alternative, then we do it. And so it's really not the investing internationally from that standpoint is not, it's really not terrible different from investing in Kansas versus California.

[Steve Blank:]

I think, a lot of your questions have been around sort of like how do you allocate. And as Curt said, you kind of take the best projects, but remindful of the risk. And at the end of the day if we do make an assessment when it all comes together in a budget about, where the capital is going and what is the overall risk profile of the company, what is the mix of margin to fee base business, how good do we feel about our ability to plan the business and importantly the distribution.

[Curt Anastasio:]

It's more of those things than international versus Holland versus England. And it's really more what Steve just said like the fee base and margin base and gives it a long term contract. This is a major oil company or a national oil company versus a small product trader, all of those things come into our risk adjusted rate of return that we want to have set as the threshold for the project. So from that standpoint, we do consider all that.

[Steve Blank:]

We do have a formal process, which we call the beta process and which we've run projects through and also in a ranking of projects. We take into account the volatility of the project is it margin based, is it fee based. Are we outlaying a lot of money over a long period of time before cash flow shows up like a pipeline project might be and so we laid all of those factors and then come up with a number, which suggest it's either a better or worst project than the others on the list. So there, I just want to show you there is a process despite our saying that we kind of look at projects on a piece mill.

[Curt Anastasio:]

And needless to say you don't just look at one factor like IRRs or whatever, the high IRR project may not necessarily win. Maybe the lower one is longer term or with major oil company or fits better strategically or has more future upside. So it's not a simple ranking by rate of return.

[John Tysseland:]

Fair enough. Good explanation, good detail. One other thing that's been asked, but I think I just had -- I'll ask it a little bit different way that now with all the rating agencies that stable investment period credit outlooks. You have a revolver, there you have some CapEx on the books that you have plenty of liquidity for next year, but the credit markets are seemingly pretty open up at this point in time. Are you thinking about terming out any of your revolver at this point, are you pretty much comfortable with the revolver balancing you have right now?

[Steve Blank:]

I think we've given it a lot of thought. But we're comfortable at the moment, because we are of the belief that the economy is recovering and capital markets are going to continue to be available. And the bottom line is, even though 10 year money for us today is probably six and a quarter, it's a lot lower than 10 or 11% that an investment grade company might have been paying six months ago. It's still a lot more expensive than 75 basis points under the revolver. So, I think we have the luxury of having good liquidity, but are mindful of the fact that in 2012 not only that's our revolver renew, but we do have 350 million of public bonds coming to you. So we will continue to look at opportunities in the capital markets to issue bonds and get further liquidity under the revolver. But it's an expensive choice to do that.

[John Tysseland:]

Yes, I know. Thanks Steve. Take care, guys.

[Steve Blank:]

Thank you.

[Operator:]

Your next question comes from the line of Joseph Ceano (ph) with Credit Suisse.

[Curt Anastasio:]

Joseph, you there? Operator?

[Operator:]

One moment. Sir, I believe his line has disconnected. We have a question from John Tysseland with Citi.

[John Tysseland:]

I've already asked my questions.

[Operator:]

And your next question is from Louis Shamie, Zimmer Lucas Partners.

[Louis Shamie:]

Everyone, my question is regarding asphalt -- what this general production out of your asphalt refineries this quarter. It seems you produced less in this quarter than you did on the year go quarters or something like 72 - 73,000 barrels a day versus about 92 last year? Given that your crude purchased agreement, I believe it's kind of a fixed volume; what's going on there? Are you building up crude inventory or how do you manage kind of the crude coming in and the rate at which your profit?

[Curt Anastasio:]

Sometimes, looking at this within a quarter, Louis will just timing of crude cargo is to one or two might slip to a different period or go into next year or there is some tolerance under the contract for that sort of thing. And there is a even a tolerance up to, so I think over 300,000 barrels per year of crude one way or the other. So, that's one factor in looking at one quarter, a specific versus another specific quarter is, we may not have actually gotten even the volume that the contract indicates. It would indicate that we get because it's not 100% completely ratable quarter-over-quarter or month-over-month. So that's one thing that's noise -- if you just took our contract and said okay ratably that equals X thousand barrels a day in this quarter, it will almost will never be exactly that. So that's one thing going on. Another thing, let's say you had an early -- what are the shutdowns, it's abandoned earlier that might have impacted the quarter that was target to last year?

[Unidentified Company Representative:]

I believe we did buy asphalt cargo in the early part of the third quarter last year because of the spark in asphalt demand. And we also have supplemental piece in addition to our contracted crude last year.

[Louis Shamie:]

So I guess to follow it down, if you look at it on a full year basis, you expect to basically cross up the amount of crude that you are committed to under the contract?

[Curt Anastasio:]

As I said, there is a tolerance for I'd say it let's call it one cargo, either way plus sometimes the negotiation with the producer, with the Venezuelans, they will allow their cargo to slip to a different period that happens from time to time as well and just doing negotiations between the parties. A contract is one thing, but then when you get down to the realities of people living with it, you have negotiations from time to time and exactly how it's going to go. So we honored a contract and they do too 100% through. The first two years we've been involved with them, but by mutual consent, we make modifications from time to time where we can and where they want too as well.

[Louis Shamie:]

Great. And then my question is just regarding the 60 million growth CapEx for the asphalt segment next year. Could you give a little bit of color as to what types of project that's going to and how you expect that to contribute to earnings?

[Curt Anastasio:]

Yeah, in the like for we're looking at Savannah at a dock expansion, which we could improve our current trade economics there at Savannah for crude delivered to the Savannah refinery. We still continue to have early part of the year finishing up some energy efficiency projects at both refineries that you mentioned early on. And then, we're looking at some things that maybe we can do to help ourselves even at same in our asphalt.

[Unidentified Company Representative:]

Most of the capital that we've pursued was in the low hanging fruit that we saw from the cargo acquisition.

[Curt Anastasio:]

Right.

[Louis Shamie:]

Okay, great. Thanks a lot.

[Operator:]

Your next question is from the line of Mark Easterbrook with RBC Capital Market.

[Mark Easterbrook:]

Hey good morning guys. Most of my questions have already been answered, but just wondering the mark-to-market gain of 15 million for the quarter, was that just running through the fuel segment again?

[Steve Blank:]

Yeah, it's just a fuel segment.

[Mark Easterbrook:]

And can you guys give us any kind of outlook of how that -- how much more hedging you have on board or how much that impacts your cash flow or your additional cash flows going forward, especially looking at the fourth quarter?

[Steve Blank:]

For what our adjustments is all, it represents our unrealized gains and loses on our hedging program. So basically you got to look at that as it's a snapshot and it's all the unrealized. So these are all open position. So in terms of how that will impact us in the future mark-to-markets change everyday. So once those things close out, you're going to be most of that should come back, I mean we do have positive coming back in the inventory values at the end of the third quarter.

[Mark Easterbrook:]

Do you guys disclose all those contracts of the hedges that you have in place in 10-Q?

[Steve Blank:]

We don't disclose them individually, but the amounts are in there; they are disclosed.

[Mark Easterbrook:]

Okay. That's all I had, thanks.

[Operator:]

Your next question comes from the line of Andrew Gunlocke (ph) with ASG.

[Unidentified Analyst:]

Good morning, thanks for taking my question. Steve, did I hear you correctly say that you are on target or targeting a 5% year-over-year increase in the NS dividend per share?

[Steve Blank:]

No, just what I was referring to is the fact that the distribution increase that we just gave led to a 5% year-over-over increase from a comparable period a year ago; that's what I was referring to.

[Unidentified Analyst:]

Right, at that stage, it comes to I think 13.

[Steve Blank:]

Yeah, and then last year, I had mentioned, we had done a 7.5% increase and all of that was financed if you will asked to keep well and non-asphalt cash flow.

[Unidentified Analyst:]

Do you see yourselves increasing the dividend for the fourth quarter as well?

[Steve Blank:]

We will take a look at it and when we close the books for fourth quarter with the Board.

[Unidentified Analyst:]

What would prevent you from increasing it? Because I think...

[Steve Blank:]

We are not forecasting when -- which quarter we might -- we are going increase distribution and buy that.

[Unidentified Analyst:]

Right. And how come NSH that was not increased a little bit more consistent with the kind of multiple of growth, how come it wasn't more like $0.445 or something like that.

[Curt Anastasio:]

I think we are slightly below 1.7 times. So I was even the that I was still just slightly below the multiply that we typically have targeted our -- talked about at least.

[Unidentified Analyst:]

And the other thing if I heard you correctly, you expected the balance sheet to be four times debt EBITDA by the end of the year. Is that right?

[Steve Blank:]

We stayed close to that

[Unidentified Analyst:]

so that suggest another 150 or so of debt to pay down between now and the end other year, is that right?

[Steve Blank:]

Approximately.

[Curt Anastasio:]

And basically coming out of asphalt season, so you are freeing up working capital collecting on your receivables from that business you are running over working capital much depends upon what price of that working capital is. But we are pretty much finished up on buying. So it's less initiative of prices, it's more of issue on the borrowing side. I mean that's not unusual and then all things being equal, you would expect debt to EBITDA also a little bit when you got into free cash flow seasonality.

[Unidentified Analyst:]

Thank you very much.

[Curt Anastasio:]

Okay.

[Unidentified Analyst:]

Thank you.

[Operator:]

And there are no further questions at this time.

[Mark Meador:]

Thank you for joining us for NuStar call. If there are any further questions, please call us at NuStar. Thank you.

[Operator:]

This thus conclude today's conference call. You may now disconnect.